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Today is Day 52 in our drive for $60,000 in 60 days through real estate investing. As we told you yesterday we have a few deals that we are looking at that just came in over the last couple days. We briefly discussed how to determine the After Repair Value (ARV) in Day 21 – Anatomy of A Deal – Part 2 Analyze the Numbers and this involves looking at other properties that have sold or are currently on the market.  This does two things, it gives you an idea of what the market is willing to pay, but it also gives you an idea of what your competition will be if you are planning to rehab & resell the property.

Where do You Find Comps?

The best place to look for comps is in your local MLS (Multiple Listing Service).  The unfortunate thing is that you need to have a realtor license to gain access to the MLS, so if you are not a realtor, you will have to have a real estate agent pull the comps for you.  Neither Kelly or I are real estate agents, and we have really found this method of pulling comps to be problematic, so we are using alternative methods. 

Sites like Zillow.com or Trulia.com can provide you with a list of properties that have recently sold, and the nice thing about these websites is that they also put the properties on a map.  So you can quickly get an indication of where the properties that have sold are at.  Zillow even gives you what is called a “Zestimate” which is their indication of the value of the property.  Be careful with this number though because we have found the accuracy of this number to vary greatly.  It should really be a starting point, and your full analysis should tell you the true value of the property. 

Zillow & Trulia will also give you properties that are currently on the market, but generally we like to use Realtor.com to find a good list of properties that are currently on the market.  Generally Realtor.com seems to be kept more up-to-date on the properties that are for sale.

Guidelines for Selection Comps

Whenever I speak with someone who wants to sell their property, I always ask them what they think the value of the property is, and how they arrived at that number.  More times than not, I get a response like this:

Well, the guy across the street just sold his house last month for $200,000 so I think mine is worth $200,000 too…

Now, what the seller doesn’t tell you is that their house is half the size, was built 50 years earlier and has a completely outdated interior.  Nevertheless, because the guy across the street sold his home for $200,000 their house must be worth $200,000 as well.  This of course couldn’t be further from the truth.  The problem here is that the two properties are not at all comparable. 

Now, with Zillow, Trulia and Realtor.com you are going to have a pretty long list of comps to select from.  However most of the properties they provide you are not comparable, so you have to sort through them.  So what do we look for?  When selecting comparable properties, we normally look for the following in our comps:

1. Size -  The square footage of the comparable property should be 20% higher or 20% lower than our subject property.  For example, if we were looking at a 1000sq ft home, we would look for comps that had between 800sq ft to 1200sq ft.
2. Area – The properties must be in the same area.  Generally we don’t like to go out more than a half mile with our comp selection.  Additionally, I should mention that you should also look at what school district the properties are in.  Homes right across the street from each other can have different school districts and this can have a big impact on the value of the property.
3. Sale Date – You should be looking at properties that have sold within the last 6 months, and the more recent the better.
4. Age – The homes should be built within the same timeframe.  For instance you wouldn’t want to compare a home that was built in 2000 with a home that was built in 1950. 
5. Construction – The properties you are comparing to should be of similar construction.  For example you do not want to compare a condo to a single family home.

Determine The Value

After you have selected the properties that have sold recently that are similar in size, age, area, and construction, you will want to calculate the price per square foot for each property.  This is done by simply dividing the sales price by the square footage of the home.  Then you will simply average these numbers to come up with the average price per square foot.  Simply multiply this number by the number of square feet that your prospective property has and this gives you the estimated value of the property.

Drive Your Comps

Normally you should have a pretty good idea of the value of the property at this point.  However, it really is a good idea for you to get out and drive by each of the comps you have selected.  We normally like to do this and give a simple rating of “Same”, “Nicer”, or “Worse” for each of the properties.  When we are doing this rating we are comparing to what our home will look like once we have completed all the repairs on the property and we are ready to sell.  Through this process you may find that you really should not be using some of the comps, and you can fine tune the value of the property.

I should mention that you don’t necessarily have to physically “drive the comps”.  In many cases you can do this virtually.  Google Maps has a feature called “Streetview” that will literally allow you to walk down the street.  You can type in the address of the property in question, and they will put you right in front of the house.  You can pan, rotate and zoom the screen and really get a good idea of the condition of the property right from your desk. 

Also many times Zillow, Trulia and Realtor.com have pictures and descriptions of  the properties.  This also serves as a great resource giving you very good insight into the condition of the properties right from your office.